Other trigger points should be when to self-insure. The usual guidance is when you could easily pay the replacement costs. Insurance is always a low odds bet. The only economic reason for it is when losing the bet would devastate you financially.
electronics insurance (self insure only)
cryonics insurance (self insure only)
travel insurance (self insure only)
renters insurance (self-insure as soon as you have enough savings to easily cover your essentials)
car insurance (I don’t think you can legally self insure all of it)
house insurance (self insure if rich and no mortgage)
So I agree 100% with 1 and 3, primarily because the profit margins on those insurances are huge, and the losses are so small.
Renters insurance and homeowners insurance on the other hand is quite inexpensive relative to what they cover, and the typical loss rates for insurers are a high percentage of premiums + float, what you are paying in premiums beyond your expected loss rate is very small but reduces the potential volatility of your wealth dramatically.
I guess it depends on what you mean by “rich”, if you mean merely “financially independent” and not having wealth far beyond your lifestyle requirements, I’d still generally decide to carry home/renters/health insurance, and most wealthy people do. Note that these cover more than simply your stuff/home, they also have liability clauses that protect your from various claims including personal injury, which can be very expensive and have little or nothing to do with your residence. If you have wealth, it’s actually a good idea to carry higher limit car insurance and a personal umbrella to protect your legal liability exposure.
I used to analyze insurance using a pure linear EV with catastrophic check. i.e. always better to self insure, as long as the worst case scenario isn’t a financial catastrophe.
Now I think of it more like portfolio balance. It makes sense to do things which give up a little bit of expectation in order to reduce the overall volatility of your net worth. Having exposure to a huge risk like your home being destroyed and you having to rebuild it adds a lot of volatility. And you can insure against it for a very small amount relative to your exposure. Also note that the actual linear -EV from buying most common insurance is a relatively small percentage of the premium cost. For typical home/auto/life/health insurance, the expected loss rate is 80-90% of the premiums.
Compare to electronics insurance or travel insurance, or credit card life insurance, where you are typically paying 5-10 (sometimes 100) times the actual expected loss rate.
I’m not sure what you mean by cryonics insurance, but if you mean life insurance to fund a cryonics contract, I don’t see how you can avoid it until you have enough assets to cover the cost. I can see possibly recommending term + aggressive savings over various kinds of permanent life insurance, but there are some significant tax advantages and creditor protections to permanent life insurance that may tip the scale.
Disclaimer: I am licensed to sell life and health insurance in MI and CT, but nothing said here should be construed as a particular recommendation of any kind of insurance—everyone’s individual needs are different.
Thanks for the insights. I am not in the industry. I hadn’t thought about the tax and creditor aspects of life insurance. I can see how those could become murky really quick. As for the cryogenics, yes I was thinking of some sort of life insurance policy. Maybe I should take it off my list since ‘permanent death’ would be financially devastating. My thinking was you probably have other things to focus on if you can’t pay it out of pocket.
As for house and renter insurance, I don’t think the insurance company’s profit is a good indicator of how much expected value they are for an individual—maybe a best case scenario. For example, these factors would vary by individual. Who is subsidizing them?
Subsidizing irresponsible dumb-asses (deep frying your frozen turkey indoors would qualify)
Subsidizing those with more stuff, better record keeping of it, and flat out liars
Subsidizing those who manipulate the claim adjuster better (are they as sympathetic to your case?)
I think the biggest thing people who haven’t thought about this deeply miss is how large the potential liability exposure is if you don’t carry property and casualty insurance. As your wealth rises, and the financial hit from losing your house becomes small enough that you could realistically self-insure (say net worth 10-20x home value), it starts to be pretty much mandatory to carry some kind of umbrella policy to insure against crazy liabilities, and nobody will sell you an umbrella if you don’t also have house/auto/etc. insurance. Like all insurance, this is -EV, but it’s so cheap compared to the potential loss that it’s generally crazy to go without it. The wealth threshold at which it could plausibly make sense to self insure entirely is in the super-rich range: probably around 100Mil$US
While you are probably subsidizing some dumb-asses to a degree, the bulk of your property risk is due to things out of your control like severe weather.
What most people should do, once they have a solid emergency fund is take a much higher than normal deductible on their auto and home/renters insurance. 5000-10000 deductibles will save a lot of money, but still keep you insured against catastrophic loss. Threshold for this is when you have a comfortable emergency fund, and I’d suggest a deductible equal to what you could save again in 6-12 months of belt-tightening without affecting your longer term financial planning. Health insurance, about the same, except most people are forced now to take a large deductible whether or not they can afford one.
At least in California, you’re nominally allowed to self-insure your car, but it’s rare and not an especially good deal: your options are traditional insurance, a large cash deposit (in the tens of kilobucks) with the DMV, or a self-insurance certificate that’s usually only given out if you’re managing a large fleet of vehicles. There’s also the option of a surety bond underwritten by a non-insurance company; how good a deal that is depends on who you’re negotiating with and I don’t know what your options are.
Other trigger points should be when to self-insure. The usual guidance is when you could easily pay the replacement costs. Insurance is always a low odds bet. The only economic reason for it is when losing the bet would devastate you financially.
electronics insurance (self insure only)
cryonics insurance (self insure only)
travel insurance (self insure only)
renters insurance (self-insure as soon as you have enough savings to easily cover your essentials)
car insurance (I don’t think you can legally self insure all of it)
house insurance (self insure if rich and no mortgage)
health insurance (self insure if super rich)
So I agree 100% with 1 and 3, primarily because the profit margins on those insurances are huge, and the losses are so small.
Renters insurance and homeowners insurance on the other hand is quite inexpensive relative to what they cover, and the typical loss rates for insurers are a high percentage of premiums + float, what you are paying in premiums beyond your expected loss rate is very small but reduces the potential volatility of your wealth dramatically.
I guess it depends on what you mean by “rich”, if you mean merely “financially independent” and not having wealth far beyond your lifestyle requirements, I’d still generally decide to carry home/renters/health insurance, and most wealthy people do. Note that these cover more than simply your stuff/home, they also have liability clauses that protect your from various claims including personal injury, which can be very expensive and have little or nothing to do with your residence. If you have wealth, it’s actually a good idea to carry higher limit car insurance and a personal umbrella to protect your legal liability exposure.
I used to analyze insurance using a pure linear EV with catastrophic check. i.e. always better to self insure, as long as the worst case scenario isn’t a financial catastrophe.
Now I think of it more like portfolio balance. It makes sense to do things which give up a little bit of expectation in order to reduce the overall volatility of your net worth. Having exposure to a huge risk like your home being destroyed and you having to rebuild it adds a lot of volatility. And you can insure against it for a very small amount relative to your exposure. Also note that the actual linear -EV from buying most common insurance is a relatively small percentage of the premium cost. For typical home/auto/life/health insurance, the expected loss rate is 80-90% of the premiums.
Compare to electronics insurance or travel insurance, or credit card life insurance, where you are typically paying 5-10 (sometimes 100) times the actual expected loss rate.
I’m not sure what you mean by cryonics insurance, but if you mean life insurance to fund a cryonics contract, I don’t see how you can avoid it until you have enough assets to cover the cost. I can see possibly recommending term + aggressive savings over various kinds of permanent life insurance, but there are some significant tax advantages and creditor protections to permanent life insurance that may tip the scale.
Disclaimer: I am licensed to sell life and health insurance in MI and CT, but nothing said here should be construed as a particular recommendation of any kind of insurance—everyone’s individual needs are different.
Thanks for the insights. I am not in the industry. I hadn’t thought about the tax and creditor aspects of life insurance. I can see how those could become murky really quick.
As for the cryogenics, yes I was thinking of some sort of life insurance policy. Maybe I should take it off my list since ‘permanent death’ would be financially devastating. My thinking was you probably have other things to focus on if you can’t pay it out of pocket.
As for house and renter insurance, I don’t think the insurance company’s profit is a good indicator of how much expected value they are for an individual—maybe a best case scenario. For example, these factors would vary by individual. Who is subsidizing them?
Subsidizing irresponsible dumb-asses (deep frying your frozen turkey indoors would qualify)
Subsidizing those with more stuff, better record keeping of it, and flat out liars
Subsidizing those who manipulate the claim adjuster better (are they as sympathetic to your case?)
Subsidizing bad law
Subsidizing moral hazard
I think the biggest thing people who haven’t thought about this deeply miss is how large the potential liability exposure is if you don’t carry property and casualty insurance. As your wealth rises, and the financial hit from losing your house becomes small enough that you could realistically self-insure (say net worth 10-20x home value), it starts to be pretty much mandatory to carry some kind of umbrella policy to insure against crazy liabilities, and nobody will sell you an umbrella if you don’t also have house/auto/etc. insurance. Like all insurance, this is -EV, but it’s so cheap compared to the potential loss that it’s generally crazy to go without it. The wealth threshold at which it could plausibly make sense to self insure entirely is in the super-rich range: probably around 100Mil$US
While you are probably subsidizing some dumb-asses to a degree, the bulk of your property risk is due to things out of your control like severe weather.
What most people should do, once they have a solid emergency fund is take a much higher than normal deductible on their auto and home/renters insurance. 5000-10000 deductibles will save a lot of money, but still keep you insured against catastrophic loss. Threshold for this is when you have a comfortable emergency fund, and I’d suggest a deductible equal to what you could save again in 6-12 months of belt-tightening without affecting your longer term financial planning. Health insurance, about the same, except most people are forced now to take a large deductible whether or not they can afford one.
At least in California, you’re nominally allowed to self-insure your car, but it’s rare and not an especially good deal: your options are traditional insurance, a large cash deposit (in the tens of kilobucks) with the DMV, or a self-insurance certificate that’s usually only given out if you’re managing a large fleet of vehicles. There’s also the option of a surety bond underwritten by a non-insurance company; how good a deal that is depends on who you’re negotiating with and I don’t know what your options are.